USDA Overhauls Price Reporting System

After an internal review, the USDA's Agriculture Marketing Service (AMS) will make several improvements to the new mandatory livestock price-reporting program. Secretary of Agriculture Ann Veneman announced changes including data testing, audit surveillance and changes to the 3/60 confidentiality rule. The review by our team outlines several important measures that USDA will begin taking immediately

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After an internal review, the USDA's Agriculture Marketing Service (AMS) will make several improvements to the new mandatory livestock price-reporting program.

Secretary of Agriculture Ann Veneman announced changes including data testing, audit surveillance and changes to the 3/60 confidentiality rule.

“The review by our team outlines several important measures that USDA will begin taking immediately to ensure the effectiveness and reliability of these programs,” Veneman says. “It is important that we continue to build and maintain a system of checks and balances to prevent any potential error in reporting.”

The review panel's key findings and recommendations include:

That there was a programming error and inadequate testing prior to and after April 2 to ensure accuracy of reports.

Recommendation: AMS will parallel test the data to experience a wide range of reporting conditions, work with the livestock and meat industries to develop validation data sets and use those data sets to test any change in programming.

AMS already has collected most of the validation data to remedy the testing problems, says Weldon Hall, assistant branch chief of livestock and grain market news for AMS.

That the audit surveillance plan for ensuring accuracy of data is behind schedule and needs improvement.

Confidentiality provisions are preventing the release of a significant portion of information.

Recommendation: The USDA will find an alternative standard to the 3/60 rule, which will apply confidentiality standards to data collected over a multi-day period rather than the current several hour period. The 3/60 rule prevents USDA from publishing data if less than three packers are in the report or if one packer's data is more than 60% of the total.

“AMS is in the process of evaluating an alternative confidentiality guideline,” Hall says. “We have been seeking input from producer groups, general farm organizations and entities currently reporting under the mandatory program.”

The new guideline must be cleared through USDA channels, Hall adds.

The mandatory program began April 2 and was authorized by Congress in 1999. Pork packers that process more than 100,000 head/year are required to submit twice-daily purchase and volume data, along with weekly slaughter cost and non-carcass premium data.

“We now have data sets for evaluation that provide AMS with information to access and analyze various means of preserving confidentiality, while at the same time publishing more data.”

Price Forecasts Accurate, but Range Wide

How accurate are the price forecasts given monthly or quarterly by university agricultural economists?

John Lawrence, Iowa State University (ISU) ag economist, set out to answer that very question. He found that, on average, price forecasts for one and two quarters into the future are fairly accurate.

Lawrence studied three methods of price forecasting, using records from 1990 to 2000, including his market hog price forecast published in the Iowa Farm Outlook Newsletter, the Chicago Merchantile Exchange Lean Hog Futures and the 10-year seasonal index.

The forecast error is defined as the actual average price minus the forecast price. Therefore, a positive error means the forecast was too low and a negative number means that the forecast was too high, he explains.

Watch for Variability

“On average, all three forecasts work pretty well for the first two quarters and are not bad for three and four quarters out,” he says. “But it is not the average that you worry about it's the variability.”

Lawrence uses this example: there is a 67% chance that first quarter prices will be from $4.28/cwt. below to $4.28/cwt. above the ISU forecast. Although this range is not very assuring, it is similar to the futures and index forecasts.

Producers must remember that the forecasts represent an average; therefore, they are not very accurate, Lawrence says.

“Forecasts do, with the results of this study, provide a likely range of prices and a realistic measure of the risk,” he says.

“The futures market, with a good estimate of the basis to the cash market, is a quick, always available and free forecast that is as good as anything out there,” he says. “But keep in mind it is a forecast at that point in time, not a guarantee of what prices will be unless the producer takes action to hedge at that price.”